A few years ago, financial security was synonymous with a steady job. But that's no longer the case. Today, more than 30% of American workers are freelancers or temps, and as per current projections, this number will continue to rise. If you're one of those freelancers, you know that financial stability is hard to come by. While there are benefits to working for yourself—flexible hours, choosing your own clients—there's also less predictability regarding income and expenses. To survive as a freelancer without losing your mind (or your house), you should create a sustainable game plan for money management. This way, you can spend less time on administrative tasks and focus on building your career. This guide will show you how.
Managing finances is crucial for a freelancer
Freelancing is tough. You're not just doing a job; you're running a business. The good news? Managing your money doesn't have to be complicated. We'll show you how in this guide to financial success for freelancers.
The first step to any financial planning is understanding how much money you need to live. It's a simple concept that most freelancers don't spend enough time thinking about. Living expenses are the most vital cost you need to track. This is because they are a direct indicator of how you live, which matters most.
First, figure out how much money you need monthly to live comfortably. Make sure that this includes all your living expenses (rent/mortgage payments, food, utilities, travel costs, etc.). Also, include any unforeseen costs such as medical bills and other needs for which an emergency fund will be beneficial.
It's also important to remember that there are two types of expenses: business-related and personal/living (i.e., food). Expenses relating directly to servicing clients are considered business expenses; anything else falls under personal/living expenditures.
If you're new to freelancing, here are some tips for keeping track of your finances and making sure you have enough money to cover your living expenses and other costs:
Create a budget
You may think creating a budget is unnecessary if you're only working part-time or just starting as a freelancer. But even if you're not making much money yet, it's essential to set aside enough for taxes, health insurance, and other expenses that will come up later in the year.
The key is to make a budget that's realistic and sustainable. Your budget should reflect your actual expenses, not just what you think you can afford.
The first thing you need to do is figure out how much money you bring in each month. It's easy to get caught up in the excitement of starting your own business, but don't forget about basic expenses like rent and food — especially if there aren't any other sources of income. If you don't know where all your money goes every month, try tracking it for one or two weeks (or longer) with the help of a free app like Mint or GoodBudget. If you are not comfortable with apps, you can go simple and use Google Sheets. Then use those numbers as a baseline for creating your new monthly budget.
Write down the "musts"
Now write down everything else that is important for you and your lifestyle (for example, gym membership or regular vacations). Once you have written down all these things, add them up along with your living expenses and see the total amount per month.
Try to stick to your budget. There will inevitably be times when things go wrong, and you spend more than expected. If this happens, try not to get discouraged! Remember that this situation isn't permanent; it's only temporary and will pass. And when it does pass, take time to reflect on what went wrong so that you can make better decisions in the future.
Save money for emergencies
When you're self-employed, it can be easy to put yourself last. But when you're running your own business, creating an emergency fund for yourself and your family is crucial.
The first step to being a financially successful freelancer is having enough money to survive. That may seem obvious, but many freelancers don't take this step seriously enough until they're already broke. The best way to ensure you have enough money is to set up an automatic savings plan that takes money out of each paycheck and puts it into a savings account or investment account so that you never see it again until you need it.
It's common for freelancers to get hit with unexpected expenses like medical bills or car repairs. If those things happen frequently enough, they can put a severe dent in your finances! Build up an emergency fund by setting aside some of the money from each paycheck and putting it into an account where it can't be touched unless there's a real emergency on the horizon.
Short summary of the first part to have a financially sustainable life:
You need to know how much you need to live.
You should save at least 20% of your income, but the ideal figure is closer to 30%.
You should spend less than you earn—if not, it's time to make some changes.
Tracking your expenses is vital to get a handle on where all your money goes!
If you're just starting out or are still learning the ropes, it can be tough to figure out exactly what's going on with your business finances. You might find yourself wondering if you're making money or spending more than you need to. It takes some attention and focus to keep track of all these numbers and ensure they work out in your favor.
First Gig and Other Clients
Now that you have organized your expenses and started to track them, you know how much you need to earn. It's time to get your first gig and get paid!
As a freelancer, you have complete freedom over your own time and projects. This is both a blessing and a curse—when you're working for yourself, the responsibility is all on your shoulders. No one else will be there to make sure that you get paid for every hour that you work.
The first gig is the most important one you’ll get. You want to make sure it goes well so that when your client writes a review for you, it’s positive and encouraging. You also want to make sure that the client pays you promptly after the work is done and then perhaps gives you more work in the future.
In order to ensure this happens, you can start small. Find a small project—like writing blog posts or editing photos—that takes up just a few hours of your time but can be completed in one sitting by someone with basic writing skills. Find an appropriate rate for what this type of work typically costs (you can search the pricing online for similar tasks) and quote that price; clients will often expect to pay little, so start low and increase over time as necessary.
If you want to scale your business up and make more money, there are a few things that you can do to scale up your freelance workload:
By finding more clients who will pay you for your work. This is the hard part because it requires a lot of hustle. But it's also the most rewarding way to grow your business and make more money than you would at an office job.
By bringing on a team of freelancers who can help you with different aspects of running a business (such as marketing, bookkeeping, or graphic design). You'll be able to charge more per hour once you have others doing some of the work for you.
Don't worry, when you get to this stage, you won't have to do everything yourself.
When you feel like you're there, you can start with hiring a bookkeeper. They'll take care of all the paperwork for you, leaving you with more time and energy for other parts of your business. If it's worth doing at all, it's worth doing well—and that means hiring an accountant as well. Accountants specialize in making sure businesses stay compliant with tax law so they don't get fined or have their accounts frozen by the IRS (or whichever agency is their country's equivalent for handling taxes). And if these steps aren't enough? Hire a financial planner! Financial planners can help freelancers get their finances under control by giving them advice such as: "don't panic!"
Make Sure You're Getting Paid!
For many freelancers, that's where the problems begin. It can be daunting to manage all of these responsibilities on your own, especially when you're starting out. But if you want to succeed as a freelancer, it's important to make sure that money isn't one of them.
Here are five things every freelancer needs to know about financial success:
Make sure you're getting paid
Getting paid is the most important part of your business. You want to make sure that your clients are paying on time and at all because late payments may cause struggles especially if you're just starting your business as a freelancer and don't have much on the side to cover for the lost time.
It's common for clients to delay payment or even refuse to pay up altogether. You should have a contract in place before working on any project for a client — but even then, don't assume that someone will always stick to their end of the bargain. To avoid being left holding the bag, make sure you have a payment plan in place before beginning work on any project, and follow up with clients regularly while they're still working on their side of the deal.
As a freelancer, it's up to you to collect payments from your clients and deposit them into your bank account. This means setting up an automated payment system so that clients have no excuse for not paying on time — and if they do miss a deadline, getting in touch with them as soon as possible to resolve any issues.
Track your payments
Freelancers also have the option of using online payment processors like PayPal or Stripe to handle deposits, but that doesn't mean you should rely solely on them for accounting purposes. Make sure all payments are tracked in an accounting program like QuickBooks or FreshBooks so that you can easily see how much money is coming in and out at any given time.
Set strict deadlines
There’s a saying in business that goes something like this: “If you don’t know what time it is, ask someone who does.” The same goes for freelancers — if you don’t have a deadline set (and communicated) with your client up front, then they may not expect one.
Make sure that you set a strict deadline for when you expect payment by and make sure your client understands what it means for their project if they don’t pay by this date (for example, an extension on the project). Don't forget to follow up with them once the deadline has passed!
Taxes for Freelancers
Paying taxes is an unavoidable part of working as a freelancer. The good news? You have more control over your tax situation than most people think.
As a freelancer, it's essential that you track your expenses and make sure that everything is paid for appropriately—from your computer and cell phone bills down to business cards and printer ink cartridges. This way, when tax season rolls around each year (or quarter), all of these expenses are accounted for so that nothing slips through the cracks. Keep in mind: It's against the law not to report income from self-employment!
Taxes are a complicated subject. The good news is, though, that once you understand them and find the right tools, taxes can be an easy part of running your business. Let's get started with some basics:
What is tax?
Taxes are the money you have to pay to the government in order to live in the country where you live. It's something we all have to do if we want basic services like police protection and roads.
Taxes are based on the income you earn from your work as a freelancer. Income tax rates differ from country to country so be sure to check with your local authority if you’re not sure how much tax you need to pay each year!
How do I calculate my taxes?
Taxes are a fact of life for freelancers. There's no getting around them, so you might as well learn how to deal with them efficiently and effectively.
You can have an accountant or bookkeeper who will help you figure out what percentage of your income goes toward tax each year (this percentage varies from country to country). If this sounds overwhelming, don't worry—there are apps that make it easy!
In order to calculate how much tax you need to pay each year, simply subtract all of your expenses from your total income (do this at least once per month). This will give you net income which includes only what’s left after covering all expenses related directly or indirectly to earning this amount including rent/mortgage payments made during that time period measured in weeks/months rather than days since monthly bills tend not to change too much depending on when they were first set up.
You can find out how much tax to pay by using an online calculator like this one from TurboTax. If you are working as a freelancer in the United States, you can also get help with calculating your taxes at the IRS website.
In summary, taxes should be a part of your life every day, not just one day. It can be really challenging to include taxes in your expenses and income accounts at the last minute, two of the most important issues we talked about in this freelance guide. If you get professional help or are meticulous in your accounts, taxes will not be a problem for you and will not stay in the way of your financial success!
We’ve covered a lot of ground here, but before we sign off, just remember that being financially successful as a freelancer is doable. You’ve got this!
If you’re willing to stick it out and be patient, freelancing can be a very rewarding career. You’ll have more flexibility and freedom than you ever imagined - being your own boss is an incredible feeling! Just remember that, as with any other job, there’s no secret recipe for success. The sooner you get started on your journey towards financial independence, the better off you’ll be in the long run. Don't let anything stop you from achieving your dreams!